COLUMN-How to save twice with the saver's credit

(The opinions expressed here are those of the author, a columnist for Reuters.)

CHICAGO, March 14 - If you struggle each month to pay your bills, the idea of saving anything may seem absurd.

But what if the government gave you the money to do it?

If your income is low enough, Uncle Sam may pad your wallet if you claim a little-known freebie known as the Savers Credit when you file your tax return. With this credit, people who normally could not save a penny can end up with a tax refund big enough to seed retirements savings.

Lakewood, Colorado, financial planner DeDe Jones was able to get a 26-year-old man started with a retirement account even though he earned only $13,000 in a retail job during the 2017 tax year. By putting $520 into a Roth IRA when he did his tax return, the government gave him half of the money to fund it through the Savers Credit.

The Credit is meant to induce people with low and moderate incomes to save for retirement. Yet just 8 million people, or about 5.3 percent of filers, claimed the credit in 2014, according to research of IRS data by Jennifer Brown and David John for the AARP Public Policy Institute. About 9 percent filers should have qualified.

Getting 50 percent is a heck of a return, Jones said. A maximum credit is $1,000 on up to $2,000 contributed to either a workplace retirement plan like a 401(k) or an IRA.

To qualify, a person must have earned income from a job or business, be at least 18 years old and also be independent of parents. Full-time students cannot get the credit, but sometimes young adults can be eligible shortly after starting work. Couples early in retirement also can qualify if they have worked part-time and are not pushed over income limits by pensions and Social Security.

For the full 50 percent credit, a single person cannot have adjusted gross income over $18,500; the cut off is $37,000 for couples in the 2017 tax year.

People who are slightly above the income cut-off can sometimes qualify anyway. They push their income below the threshold for the Savers Credit by opening a tax deductible IRA -- not a Roth IRA.

That is what a San Diego couple did this year to get the most from the Savers Credit. With an income of $43,966, the couple appeared to be over the $40,000 cutoff to receive a 20 percent Savers Credit. But they lowered their adjusted gross income below the $40,000 limit via each spouse putting $2,000 into a traditional IRA, according to Glenda Moehlenpah, their financial planner.

That provided an $800 tax credit, valuable since a cancer diagnosis had forced the 63-year-old husband to leave work temporarily in 2017.

With a total refund of $2,600, the couple needed only $1,300 in cash to fund $4,000 in IRAs.

A favorite strategy for people short on cash is to file their taxes early in the tax season, while indicating they are opening an IRA and claiming the Savers Credit. They do not actually put money into their IRA until the refund arrives, and taxpayers have until April 15 to deposit the money.

Another strategy: Parents lend adult children money to open an IRA and claim the Savers Credit. They repay parents when the refund arrives.

When cash is tight, sometimes people worry about tying money up in an IRA until retirement. Charlotte, North Carolina, financial planner Todd Curry helped a couple get over those worries by having them open Roth IRAs. (Although people must leave tax-deductible IRA money in accounts until age 59-1/2, Roth IRA contributions can be removed at any time.)

Curry told his clients they would reposition cash from a savings account to a Roth IRA and could pull it out if they needed it.

They saved $1,300 in taxes and feel good psychologically, he said. (Editing by Lauren Young and Dan Grebler)